6. Direct write-off method . Harrisburg Company, which began business in early 2

Question

6. Direct write-off method. Harrisburg Company, which began business in early 2007, reported $40,000 of accounts receivable on the December 31, 2007, balance sheet. Included in this amount was $550 for a sale made to Tom Mattingly in July. On January 4, 2008, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

a. Prepare the journal entry needed to write off Mattingly%u2019s account.

b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.

Explanation / Answer

DR bad debt expense      550

CR Accounts Receivable      550

The direct write off method values receivables directly without stating them at gross value and then reducing this to net collectible value by use of a contra account, which is allowance for doubtful accounts.

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